The psychology of common value auctions

One of the most interesting but unresolved phenomena in auction behaviour is the winner's curse - the strong tendency of participants to bid more than rational agent theory prescribes, often at a significant loss. To address this, an approach is proposed that uses neuroscience as a means to determine the nature of the mechanisms at play as people learn to bid. The chapter is organized as follows. Section 3.1 introduces. Section 3.2 defines the winner's curse formally and outlines the (optimal) Nash equilibrium bidding strategy. Section 3.3 includes experiments demonstrating that social context is a critical factor underlying the winner's curse, above and beyond the influence of other explanations, such as risk aversion. Section 3.4 begins building a complete model of bidding behaviour by accounting for learning in the task with a reinforcement learning model. The validity of this learning model is established with functional brain imaging described in Section 3.5 while Section 3.6 concludes.